After cuts, Fazoli’s aims for higher ground

By Tom Kaiser

Published: 07.21.2016

After becoming Fazoli’s president and CEO in 2008, Carl Howard knew the brand was in trouble when he realized the previous leadership got rid of the beloved “breadstick ladies” who used to patrol the dining rooms of the country’s largest fast-casual Italian chain.

Eliminating the delivery of never-ending stacks of buttery-soft breadsticks was only the most egregious of cost-cutting at Fazoli’s, which included plastic tableware, dwindling food quality and store designs that had grown stale even before the Great Recession squeezed the entire service economy at once.

“The brand was really in dark times,” said Howard of his early days leading the company. “The consumer was migrating away and leaving because of food quality and menu variety, and there was really no strategy in place to study the consumer.”

It wasn’t just dark ages for customers ordering a bowl of previously lackluster fettuccini alfredo. From its peak at more than 400 stores in 2004, Fazoli’s shuttered nearly half of its locations—including an entire exit from the Phoenix market—and saw its total store count drop to the low 200s by 2010.

“We are going to compete on service and food quality,” says Fazoli’s CEO Carl Howard.

“I’m not sure Sun Capital at the time was overly transparent with me about the true condition of the brand, or maybe they just didn’t know,” Howard said of the brand’s private equity owners from 2006 through mid-2015.

That all started changing, as Howard—previously of Damon’s International—began in-depth internal and external studies to arm him with the supporting data needed to sell his revival plan to his bosses at Sun.

Some of what he focused on was readily apparent when he started at Fazoli’s—like pre-baking food ahead of time, a lower level of dining room service, a stagnant menu and cashiers still using analog-style credit card terminals.

“When I started the brand was positioned as a QSR—we were trying to compete on speed and price, which I think is a horrible way to compete,” he said. “I’ve told the franchisees from day one that we are going to compete on service and food quality.”

Digging through the results of the various internal and external surveys, Howard’s ultimate plan included a few key pillars: slowing down the food preparation and delivery, revamping 90 percent of the menu including staples like the cornerstone spaghetti and alfredo sauces, refreshing the look of the restaurants, ditching the foam plates and plastic cutlery and, of course, bringing back the so-called breadstick ladies who had been jettisoned as a cost-saving measure.

Rather than jumping on board with Howard’s phalanx of proposals, leadership at Sun and some of his own executive team pushed back on the CEO’s plans, which carried a price tag some deemed too steep given the brand’s financial infirmity.

Given the pushback, Howard retooled his message to focus on their heartstrings and personal ambitions, rather than dollars and cents.

“We’re never going to grow and get to our career aspirations if we don’t push this farther,” he told the team. “The only person who agreed with me was our marketing officer—everybody else was like, no, we tried plateware and it failed. We saved $1.7 million when we took breadstick service out of the dining room and if we do that, we may miss our financial covenants.”

Weighing the parent company’s financial concerns, Howard’s defining moment came in the waning months of 2010 when he decided to pull the trigger anyway, starting in his hometown of Dayton, Ohio.

Working with a limited budget, Fazoli’s began rolling out the changes: new menu items developed by restaurant consultants The Culinary Edge, better cheeses, richer sauces with fewer chemicals and less water, authentic dishes and cutlery and a spruced up dining room with more modern colors and other cosmetic (read: affordable) changes.

“I said, ‘Hey guys, I’m making a call—it’s not a democracy. I’m going to make a decision and I really want you guys to support me,’” he recalled. He went down to Sun’s headquarters in Florida, “made a presentation and they loaned me enough money to do the rest, because the brand had no financial ability to borrow money.”

New menu items include pastas and salads, which Fazoli’s shared with FT staff members.

Changing course

In hindsight, Howard says he and his management team were “under a tremendous amount of pressure” as they furiously bailed water out of a sinking brand while the country was in a recession that uniquely impacted the casual dining segment.

“We had some real liquidity concerns and were breaking covenants left and right—all of that was tough,” he said of the worst years. “It took a couple years for it to really take off … but by 2012 we were really to the point where the turnaround was done and the brand was stable again.”

After getting Sun’s blessing to take the new menu and store changes nationwide, there was an 18-month period where the parent company had “other fires to worry about and just left me alone” to accelerate the changes.

Sun ultimately sold the brand to another private-equity firm in 2015, New York-based Sentinel Capital Partners, owners of Checkers and Rally’s, Newk’s Eatery, TGI Fridays and Huddle House. Howard said the change in ownership was a significant and positive next step for Fazoli’s, adding that he “doesn’t want or need direction” from above.

“They want to see a good, solid strategy to spend the funds and reinvest in the brand,” he said of Sentinel. “I’m trying to get to a certain level in the next five years and sell it again, and they know it.” He said an IPO is a possibility in the coming years.

Eight years into his tenure, Fazoli’s is back to building new units in a mix of traditional freestanding locations—highlighted by a fresh new end-cap design—and also adding units within a handful of convenience stores.

Asked if a push into convenience stores could cheapen the brand, Howard pushed back by stressing that today’s large-format convenience centers are nothing like old fashioned, small gas stations.

“They’ve got a Steak ‘n Shake, a Starbucks, a Dunkin’ Donuts, a RadioShack, it’s a whole strip center,” he said of a restaurant-within-a-store location in Tyler, Texas. “We’re finding sophisticated operators out there and we’re just part of their retail development, so it’s not like an old BP on the side of the road.”

With 211 units at press time—122 corporate locations and nine convenience store units—Fazoli’s has posted six consecutive years of same-store sales growth, with 91 of its franchise locations breaking sales records, and overall sales during the last fiscal year up 4.8 percent on a 3.5 percent traffic increase.

During its turnaround, average unit volumes increased by $300,000 to approximately $1.1 million—a 35 percent increase in four years. In an effort to gain franchisee attention in a crowded restaurant market, Fazoli’s rolled out a range of incentives, including reduced franchise fees and royalties.

“These are the fun days,” Howard said of the brand’s recent gains. “These are the days you celebrate, sit back, reflect and say it was really worth it.”